In the wake of the recent announcement of merger talks between Office Depot Inc (NYSE:ODP) and OfficeMax Inc (NYSE:OMX), pundits and analysts have increasingly weighed in on the future of the largest office supply chain, Staples, Inc. (NASDAQ:SPLS). After watching shares decline 45% over the past three years, contrarians are piling on and sounding the horn for a turnaround.
While turnaround stories make great press (who doesn't love reading about Lou Gerstner at International Business Machines Corp. (NYSE: IBM) and Steve Jobs at Apple Inc. (NASDAQ: AAPL)?), the fundamentals just don't support the bullish case for Staples. Gerstner and Jobs redefined IBM and Apple; they overhauled strategy and fundamentally changed the way those companies did business. Staples is undergoing no such revolution.
The bulls point toward $1 billion cash on the balance sheet, and total cash flow from operations of nearly $900 million for the first three quarters of 2012. But material increases in competition, amid already lackluster growth, are too significant to justify any reversal in the stock's downward slide.
The notable news of late is of course the merger of Office Depot Inc (NYSE:ODP) and OfficeMax. The new combined company would have revenues of nearly $18 billion, compared to Staples' revenue of $25 billion last year. Efficiencies gained by combining operations could save upwards of $500 million-600 million in costs, according to various analysts covering the space. The efficiencies would primarily be driven by closing overlapping and underperforming stores. If this deal goes through, Staples would face a new, formidable competitor with significant scale and upside.
The other takeaway of these merger talks, which is just as significant, is the aggressiveness in the industry to upend the status quo. Management at Office Depot Inc (NYSE:ODP) and OfficeMax are making bold moves to improve their business. That determination, as of yet, is not evident at Staples.
Furthermore, there is an elephant in the room. Over the last two years, Amazon.com, Inc. (NASDAQ:AMZN) has been slowly and steadily building its office supply business, and while Staples has a strong online presence, it has come under intense pressure from the low-cost, low-margin Amazon model.